Analyzing The Safety Of A REIT Dividend

| About: Realty Income (O)

In a previous post we reviewed how one could analyze the safety of a dividend by using available metrics and data found online. The point of this analysis is to assign a rating as well as point out a company's current strengths and weaknesses related to its ability to pay a dividend. Although this proves to be a good tool for assessing a normal stock's dividend safety, the metrics we look at need to be tweaked when reviewing Real Estate Investment Trusts (REITs).

REIT Dividend Safety Analysis

REITs are well known dividend paying stocks and are normally at the core of a dividend income investor's portfolio. But because REITs enjoy special tax treatment that leads to higher dividend payouts and less cash on hand, our analysis needs to focus on different metrics. Below are the measures we will look at and the point values assigned to each.

* Please keep in mind that this is by no means an end-all be-all way of fully determining a company's ability to pay its dividend. Its intent is to point out a company's strengths and weaknesses and help investors focus on areas that may need to be looked at in greater detail before deciding to invest.

Number of consecutive years a dividend has been paid

  • 1 point for more than 9 years
  • 2 points for more than 29 years

Number of consecutive years a dividend has been increased

  • 1 point for more than 9 years
  • 2 points for more than 29 years

Annual dividend cuts in the past 10 years

  • -2 points for each cut

Adjusted Funds From Operations (AFFO) payout ratio - Earnings are not a reliable stat for REITs. Instead we want to use AFFO when looking at the dividend payout ratio.

  • 1 point for most recent FY less than 90%
  • -1 point for between 90% and 100%
  • -2 points for > 100%

Occupancy Rate Growth - Occupancy rates provide an indication of anticipated cash flows as well as demonstrates the overall demand of the company's properties.

  • 1 point for most recent FY being greater than or equal to the 3 year average.

Debt to total capital - Ratio used to determine how levered a company is.

  • 1 pt if less than or equal to 60%
  • -1 pt if more than 60%

Interest coverage ratio - Ratio used to determine how easily a company can pay interest on outstanding debt.

  • 1 pt if greater than or equal to 1.5
  • -1 pt if less than 1.5

S&P Bond rating of the stock

  • 1 pt for BBB- and up (Investment Grade)
  • -1 pt for BB+ and lower

ISS Governance QuickScore - Score used to identify potential governance risk (the lower the score the better).

  • 1 pt for less than or equal to 5
  • -1 pt for greater than 5

In order to test out this safety analysis let's take a look at one of the more widely held and well-know REITs, Realty Income (NYSE:O). Realty's primary goal is to provide "dependable monthly income to shareholders". The company's dividend is so ingrained into its corporate culture that it calls itself "The Monthly Dividend Company". So based on our dividend safety analysis, should there be any reason to worry about Realty's current dividend?

*Financial metrics come from Realty Income's 10-k for FY 2013.

Clearly there is a reason Realty is such a popular choice among dividend investors. The only metric investors may wish to keep an eye on based on this analysis is the AFFO payout ratio as it is close to the 90% range. This higher payout ratio is likely due to the large dividend increase Realty made after its acquisition of ARCT last year. In fact, management has already stated that is intends to work towards decreasing the payout ratio in 2014. Based on the above analysis it appears that Realty is in great shape and its current dividend payment should be considered safe.


For anyone who is looking for an alternative to low yielding money market and CD rates to generate income, but are afraid of investing in dividend stocks because they aren't "safe", I encourage you to use these safety analyses. In the case of Realty Income, wouldn't a 400% increase in annual income vs. a CD be enough to justify the additional "risk", especially when a company has a dividend history and current financials like Realty?

Disclosure: I am long O. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The 4% Portfolio Retirement Service recommends O.